CFO World Blogs

A loss for all

Ben Griffiths — Mon, 14 May 2012 09:13:17 GMT

The focus on fat cat pay in recent weeks has rightly fallen on to boardrooms. Some of Britain’s biggest companies have found themselves embarrassed after investors big and small refused to support gold-plated remuneration packages.

Several chief executives including Sly Bailey at Trinity Mirror, David Brennan at AstraZeneca and Andrew Moss at Aviva have stepped down. But it’s not just the blue-chip bosses who’ve suffered indignities during the so-called ‘Shareholder Spring’ - which borrows its name from last year’s Arab uprising. Ordinary City workers have found their take home pay is falling too.

Reaction to the annual Centre for Economics and Business Research report into City bonuses last week was predictable. It’s just the latest instalment of banker bashing. But as usual the critics neglected to consider the wider implications as they cheered the thought of fewer Porsches being sold within the M25 area.

The City of London remains a central part of our economy without which we stand no chance of swiftly recovering from the double dip recession in which Britain is now mired. CEBR forecasts predict slower output growth for London than in previous estimates with the economic outlook now looking weaker for longer.

Behind this downgrading of the capital’s growth prospects is the ongoing weak performance of the financial services sector. Some estimates I’ve seen reckon close to 100,000 jobs are disappearing in and around the Square Mile, down from the peak of 350,000 employees who staffed the City during the recent boom years.

Worst of all, with the City making up roughly a fifth of London’s economy, the industry which helped drive growth before 2008 is now the bit that’s holding us back from recovery.

Yes we do need to diversify our economy - or rebalance it, to borrow George Osborne’s phrasing. But business services and other City-related industries could be a critical growth area to offset the decline in financial services posts, some of which must surely be moving to other high growth cities such as Singapore and Hong Kong.

Perhaps most worrying of all for Osborne and David Cameron is the fact that fewer City workers means a lower tax take.

When City employees lose out on their bonuses, so too does the Exchequer. Each year more than half the money paid out in bonuses is ultimately handed over to the taxman.

Last year this was the equivalent of about £2.5 billion, whereas the entire bonus pool for 2012/13 could be less than last year’s tax take at just £2.2 billion.

It’s a far cry from when bonuses hit their £11.6 billion peak in 2007/08 - just before the global financial crisis. Then a staggering £6.8 billion was collected by the Treasury, helping fuel Labour’s splurge on public services.

With the euro zone in turmoil and many of the City’s big bank employers reporting lacklustre figures, HM Treasury must be wondering where this year’s taxes are going to come from. We can try and rebalance the economy all we like, but start-up businesses are not going to fill the black hole left at HM Revenue & Customs.

Opening late for business

Ben Griffiths — Wed, 09 May 2012 09:41:26 GMT

Pity the poor traveller. As thousands of people prepared to head off abroad for the Bank Holiday weekend thoughts inevitably turned to what kind of reception airline passengers would receive when they arrived back in this country.

Would the chaos that has dogged immigration control points at our airports be resolved following a week of shocking failures?

Described by the British Chambers of Commerce as a ‘national embarrassment’, the immigration queuing farce risks becoming the enduring image of the UK, particularly London, in the nation’s big year under the global spotlights.

After the queuing debacle the problems facing the UK Border Agency multiplied when a core computer that handles applications from people - many of them business travellers - looking to extend their stay in Britain collapsed.

And border staff could soon stage a one-day strike. It all adds up to an appalling image for this country in a year when all eyes are on our performance.

It’s not just tourism that can be affected. Britain must at all times project an image of being open for business to help attract trade and investment.

Willie Walsh, the boss of British Airways’ parent company, said the situation was a massive problem. He’s got a point when you consider we welcomed a phenomenal 30 million visitors last year with at least that many expected to arrive in the UK during 2012.

I spent Bank Holiday abroad at a wedding but deliberately chose to avoid the major airports in the hope of evading the ‘Heathrow hassle’ that has become the norm when travelling to or from the UK.

During the past year or so I’ve increasingly heard from business people how difficult it is to negotiate Heathrow. It’s been part of the debate surrounding whether the airport remains Britain’s hub to the outside world. Many contacts have told me they’re already avoiding Heathrow for their long-haul flights by making connections in Paris, Frankfurt or Amsterdam instead.

The issue of a third runway has been kicked into the long grass. Despite supporting the idea that we need a progressive aviation policy to fuel economic growth, I’m glad the third runway is off the table for now. We are unable to cope with the volume of passengers at Heathrow as it stands. What would happen if the airport’s capacity - already at bursting point - were to be increased further?

I’ve no doubt that the experience for the traveller would deteriorate yet further.

We have a matter of just 80 or so days to get our transport systems sorted before the huge influx of athletes and visitors begins - and just a month until people troop to London for the Queen’s Diamond Jubilee celebrations.

As the BCC’s director general John Longworth has warned, business people and tourists have the whole world in which to choose to invest and spend their hard-earned leisure time. We risk turning them away at the gates to Britain with one poor travel experience.

Power to the investors?

Michelle Perry — Thu, 03 May 2012 15:42:40 GMT

Today, Aviva became the latest in a growing list of European companies to face a shareholder backlash over escalating executive pay, when more than half of its investors voted down pay plans at the company’s annual general meeting.

On Monday Aviva tried to head off such a protest when it announced that chief executive Andrew Moss would "voluntarily" surrender his 2012 pay rise. It was a case of too little, too late for the investors though.

Scott Wheway, chairman of Aviva’s remuneration committee, issued a statement saying that investors had told him they wanted to see “an even closer correlation between our pay packages and shareholder returns”. He said that “having listened to them, we have sought to address their concerns”. And today he personally apologised for mistakes made.

But the seemingly opportunistic statement did little to cool investor anger at seeing their returns plummet while bosses pay continued its upward trajectory. Other companies should watch carefully what is happening here because this investor reaction is for a company whose performance has been fairly robust.

In March the insurance group reported a bigger-than-expected 6 percent rise in 2011 earnings and recovering capital reserves. The UK's second biggest insurer posted an operating profit of £2.5 billion. Last year however shares in Aviva lost almost a quarter of their value due to its exposure to troubled euro zone economies. Investors clearly haven't forgotten despite recent positive results.

Both Barclays and Credit Suisse have seen shareholder backlashes at their agm’s recently and investor lobby groups like Pirc are busy issuing advisory notes to warn investors to vote down up-and-coming pay deals at companies like Standard Chartered, whose agm is due on 9 May.

It’s curious to see such strong investor discontent when although the UK has reentered recession for the second time since the financial crisis, recovering is seemingly on the horizon. And we have just experienced four years of extremely tough economic circumstances but little obvious protest from most investors.

Yes spiralling executive pay has been in the headlines a great deal over the past year. Indeed I’ve covered it increasingly over the past 12 months as more and more research reveals a yawning gap between the average worker and bosses at the UK’s top companies. But it seems to have taken a long time for investors to wake up to the positive effects of investor activism and remind directors who the true owners of companies are and that they are, after all, merely temporary stewards of long-standing companies.

What’s really curious though is that these revolts comes at a time when government is taking steps, backed by investor groups, to beef up the powers of shareholders with plans for a binding vote on corporate pay deals and exit payments, among others.

So, what's the subtext of this current round of investor activism? That, shareholders are unsure about new powers being thrust upon them by ministers? That, they are therefore actively showing business secretary Vince Cable what they can do if they fulfil their side of the bargain and act on excessive pay and other issues. Of course I understand that it is also a definite protest to boards over extortionate pay and bonuses while their returns are diminishing.

CFOs regularly tell me that investors already have at their fingertips the powers to boot out directors or curb pay if they aren’t happy by talking more to both the executive directors and non-executives. So is this a subtle protest within a protest?

I wonder is this round of activism - albeit highly effective - also a show of power to government to discourage Cable from legislating?

Time to act tough

Peter Williams — Tue, 01 May 2012 13:10:58 GMT

Quality data and relationships are holding back companies from gaining the control over their cash that they need. A survey among treasurers in global companies by Ernst & Young found a relatively relaxed attitude to areas such as funding, which at first glance is a surprise given the panic we’re all meant to be in over sources of finance.

But panicking seems to have worked: refinancing seems under control - at least for the moment - while much unease continues over the traditional bugbear of cash forecasting, which many admit is a long way from leading practice.

One possible reason suggested by E&Y “is the fact that cash forecasting depends highly on other business areas and therefore it is not entirely under treasury control”. Yes, you’re right, it sounds like E&Y are trying to be nice to clients and potential clients. Areas for improvement cited by the world’s top companies include working capital management, technology and data and cash forecasting - which needs to be improved in an astonishing nine out of 10 global corporates. Despite the shortcomings that surveys like this have thrown up over the years, corporates seem slow to stir themselves to action.

Information and data for cash forecasting, which needs to be timely and of good quality, emanate from the business units. But to achieve this end, it seems the finance department needs to work smarter to ensure it forges better mutual understanding and a greater appreciation with other business units.

As well as working with the business unit, the better deployment of technology should go some way towards improving cash control to unlock trapped liquidity. For global companies that means getting those expensive enterprise resource planning (ERP) systems to work properly.

But it is more than just technology: a clear problem is one of changing the culture across the company to allow for the construction of in-house banks and payment factories in shared service centres. This requires the acquisition of those skills to make it work and the power to wrestle control of the cheque book - oh OK its electronic equivalent - away from local accounting centres.

The biggest obstacle by a long way was the lack of business unit co-operation and motivation cited by nearly 50 percent of those surveyed as an issue. Factors such as lack of management or board buy-in just aren’t an issue; they were mentioned by fewer than one in five.
Given all the finance shocks the corporate world has suffered over the last few years it is hard to believe that some businesses are still behaving as if cash management is an unimportant irritant.

CFOs do need to ensure that their teams work constructively with the rest of the business, but it still seems too many finance teams are frustrated in their attempts to receive the help they require. Perhaps it’s time to cut up rough.

No turning back from transformation

Jaime Lyon — Mon, 30 Apr 2012 13:14:52 GMT

As chief financial officers continue to look at transforming the finance model, the benefits of shared services - transparency, lower costs, greater efficiency, standardisation and improved governance - are now clearly seen by finance leaders who have high hopes and great aspirations for what these models can delivery, according to our latest research.

But aspiration is one thing, pinpointing and achieving the benefits in practice is an altogether different reality. Experience has shown that shared services, done well, help reduce costs and standardised processes, among other benefits. Some would also argue that the change has helped drive transparency too.

This is all very laudable stuff, but speaking to CFOs and transformation leaders there is always the question of ‘what next?’ And ‘what else?’ Oh and ‘by the way we still want to reduce cost further’.

We see shared services as a work in progress. Some leaders use these services as a functional finance fix - improving the ‘factory’, while others see shared services as having a greater purpose. Leaders looking to transformation position the finance function as an engine of change, helping to transform and align end-to-end processes, regardless of where they are housed (in-house, outsourced offshore, onshore etc).

But irrespective of approach, the main focus is always cost and efficiency. Some experts recognise that the businesses they service are not focused on better finance functions per se, but how finance can better serve the wider business. Business customers are often looking for ‘more’ - ‘how do I get more cash, more information, more service, more analysis and more business insight? What is the optimal finance model to give me this?’, for example.

I don’t suggest the answers to these questions are simple, but it’s the so-called “softer stuff’- managing change and dealing with staff - that is often overlooked when trying to achieve transformation success.

Managing the change process continues to be a huge challenge for many businesses, and connecting the different parts of finance to make them tick perfectly together remains problematic. One particular area of difficulty is in articulating the role of the ‘retained’ finance function, shifting its focus to become a business ‘partner’ and providing oversight; rather than carrying out many of the finance processes.

Service too is problematic. Great service from the shared service centre goes beyond simply meeting service level agreements - the experience of the service also matters.

So, what does this all mean for tomorrow’s finance function? Well it’s good news that finance leaders aspire to transform finance, but at the heart of making these new finance models work is the need for deeper capability. It is a more robust capability in governance, management, change and service that will bring the true benefits to the business.

Clearly there is no turning back from finance transformation, but there is much more that can be done.

When did we stop taking responsibility?

Ben Griffiths — Fri, 27 Apr 2012 09:37:07 GMT

Hector Sants, chief executive of City watchdog the Financial Services Authority, delivered his parting speech this week and called for more action to deliver effective reforms on corporate governance.

We’ve heard some of what he had to say before. But among the predictable rhetoric about the regulatory reforms since the financial crisis, Sants identified individual responsibility as a failing during the global meltdown that threatened the world’s banking system.

Management, he said, are responsible for running companies and ultimately companies fail because of the decisions taken by their boards and their management. He identified shortcomings exposed by the crisis including a failure in behaviour, attitude and in some case competence.

Bosses such as disgraced former Royal Bank of Scotland boss Fred Goodwin - who was stripped of his knighthood for bringing the once-proud lender to its knees - seem to have no clue as to the standards of behaviour they should be demonstrating.

Many bosses were incompetent in their actions, but also driven by the short-termism that has dogged our industries in recent years. Quick returns for investors have surpassed longer-term gains in the estimations of many boardrooms.

While Goodwin and a clutch of other flawed bankers may have publicly apologised, their actions in resisting regulators and fighting every step of the way brought the entire financial services industry into dispute.

But it’s not just bankers who have been shamed by their attitude to scrutiny.

Soon after the Gulf of Mexico disaster two years ago, the then-boss of BP, Tony Hayward, complained he simply wanted the biggest oil spill in US history over so he could have his life back.

Hayward ultimately paid for his crassness with his job, although he’s since gone on to do rather well with other business ventures.

One individual surprised me this week: Stephen Hester, the frequently embattled boss of RBS. While issuing a rallying cry to RBS staff to stay strong amid the banker bashing, Hester pledged to be a “lightning rod” against criticism. In essence he was telling the world that he has his hand up to take responsibility for what happens at the taxpayer-owned bank.

About time too one might think, for this is a man who - on a salary of £1.2 million - was forced to waive a bonus of almost £1 million only after coming under fire from politicians and the commentariat.

As Sants concluded in his remarks, companies must ensure they have an appropriate culture that will deliver on their obligations to society. The only way to achieve that is for individuals to step up to the plate and make decisions based on morally-sound principles rather than short-term goals.

Maybe the RBS boss is finally beginning to understand.

Let's slow things down

Ben Griffiths — Fri, 20 Apr 2012 11:07:32 GMT

It’s difficult to shake off the sense of deja vu pervading some of my working life as a City and financial journalist these days.

The euro zone debt crisis, like a crazed zombie from a B-list movie, refuses to die. The perennial problem of excessive pay just keeps on coming. And you can be certain that retailers will complain about the weather every time they issue a statement to the London Stock Exchange.

But one problem that I’ve found particularly vexatious is the current fashion for quarterly reporting among Britain’s blue-chip companies.

I’m reassured to find that it’s not just me who’s troubled by it. Indeed, no less a name than respected economist and commentator John Kay has carried out a review for the government. His findings, published in February, concluded that it was forcing investors and companies to take a short-term view.

What’s new in that, you may ask?

Investors have long been after quick rewards. The example of US processed cheese giant Kraft buying up historic confectionery group Cadbury’s is a good example. Short-term appetite among Cadbury’s investors for a quick return led to the rapid takeover of a British institution.
Now pension funds, insurers, shareholder groups and small retail investors are branding quarterly reporting as “useless or misleading”.

I first argued that very point three years ago when in a quick straw poll of financial market participants I discovered most thought quarterly reporting meant there was simply too much to digest.

On one particular day I counted no less than nine FTSE 100 companies reporting their figures including some of our best known companies: Antofagasta, AstraZeneca, BAE Systems, British American Tobacco, BSkyB, BT, Centrica, Reed Elsevier, Rolls Royce and Royal Dutch Shell.
That’s quite enough for any institutional investor to handle in one go.

At that time my interviews found many analysts whose reporting calendar was so packed they were having trouble producing research notes for their clients on the same day big results were posted. How then could they expect to write timely, relevant research that would interest investors and guide their behaviour?

Predictably, the UK listing rules determine when companies must make their financial results available. And because most businesses work to either the fiscal or calendar year there is bound to be inherent congestion at certain times.

Yet, how are Kay’s recommendations -- that investors take the role of stewards, putting long-term interests to the fore and trying to influence behaviour rather than threatening to pull their investments -- to be implemented without a slowing down of the rush to find value?

Chief executives, CFOs and their fellow board members are far too fixated on meeting investors’ demand for quick wins, Kay found. Instead we should be demanding a slower-moving and, dare I say it, more boring journey to long-term goals, which may not create instant gratification.

The Confederation of British Industry nicely summed up my feelings towards quarterly reporting. The employers’ group described it as “onerous for companies” and “adding little value for investors”.

It’s high time the practice was abandoned.

Is extradition a one-way street?

Ben Griffiths — Mon, 16 Apr 2012 10:16:31 GMT

Seeing the images of cleric Abu Hamza this week as he faced being shipped to the US on terrorism charges sparked memories for me of 2004, and the London extradition hearing of the so-called NatWest Three.

The case of these former Greenwich NatWest bankers was the first to be tested under the then new 2003 Extradition Act, a non-reciprocal arrangement with the US, which was designed in the wake of the 11 September terror attacks to fast track the deportation of terrorism suspects wanted on the other side of the Atlantic.

At the time the white collar case of the three - David Bermingham, Giles Darby and Gary Mulgrew - made front page news, involving as it did the dangerous precedent of allowing the US authorities to extradite British citizens without the need for prima facie evidence. In other words, without the need to present proof any crime has been committed.

The NatWest Three lost their case and various appeals and served time in a Federal prison in Houston, Texas during 2006. But the issue of extraditions to the US remains vitally important and unresolved six years on.

Legitimate business people, as well as innocent members of the public, can easily find themselves being extradited to the US on very thin evidence.

Take the case of Chris Tappin. The 65-year-old former freight company chief is accused of trying to ship missile components to Iran. He was extradited in February without being able to challenge the allegations in a British court.

In order for Britain to try and extradite any US citizen to face justice here, a US court would have to decide whether the move would infringe their rights under the Fourth Amendment of the US Constitution, which determines that probable cause must be demonstrated.

It is the basic unfairness of the arrangement which sticks in the craw. Figures obtained last year by one British newspaper showed that since the treaty came into force nine times as many Britons had been extradited as US citizens. More than 30 British citizens have been sent to the US for trial. Just three Americans have come to the UK to face justice.

Where any alleged misconduct or illegal actions have occurred in the UK, then suspects should go to trial here. That argument was a key plank of the NatWest Three’s defence. And yet it failed. The trio subsequently pleaded guilty to charges related to the collapse of US energy trading giant Enron.

One could argue that the men were ultimately treated justly given that they admitted to the crime.

And yet the focus of much of the media coverage at the time, of which I was part, rightly in my view emphasised the principle that was at stake.

It’s time for the government to take another look at our treaty with the US and ensure extradition is not a one-way street.

Refinancing under public scrutiny

Peter Williams — Fri, 13 Apr 2012 14:08:38 GMT

When holiday company Thomas Cook went through its full year results to the end of September 2011 just before Christmas it said it was making its £891 million debt mountain “a clear focus”.

Since then it has been in negotiations with its banks and on 10 April it was forced to issue an unusual statement dealing with news reports over its refinancing.

Under the heading Response to press speculation regarding financing, the group said “Thomas Cook Group plc confirms that it is in advanced discussions with its banking group about extending its financing arrangements.

The City welcomed the news that the company seemed to be exploring every option to generate finance. A look at the results suggests the actual cash it is generating from its business does not appear to be the problem.

During its previous financial year (FY11) it had £289 million of net cash from operating activities a tick down from £299 million in FY10. And free cash flow increased £50 million but the net debt position still deteriorated by £88 million from one financial year end: mostly as a result of an increase in interest and dividends, which not even a sharp decrease in cash spent on capital expenditure could reverse.

The term ‘wall of refinancing’ has become a truism discussed in this blog; Thomas Cook’s individual situation highlights the truth behind the cliché. The results statement boasted of an additional £200 million revolving credit facility (RCF). But even that only represented little more than 16 months of money as it was available only until 30 April 2013.

Another £1 billion falls due 13 months after that on May 2014. This consists of another RCF of £850 million and a £150 million term loan, though they could both be extended by a year.

Longer term there is a £250 million Eurobond maturing in June 2015 and a £300 million sterling bond two years after that, although at 7.75 percent it’s a pricey little number.

Hardly the most comfortable of debt maturity profiles. All told, the debt drove the underlying finance charge up from £116 million in FY10 to £122 million in FY11, a fair chunk compared to £304 million profit from the underlying operation.

It will be a few weeks before the details of the refinancing become known. No doubt there will be some hard talking ahead. Having to go through such tough work is unpleasant enough for the CFO and treasury team. Doing it under the glare of public scrutiny where every option is weighed by City analysts and financial journalists only increases the pressure.

However given the debt that still lurks on some corporate balance sheets, and the heightened concern over a fragile economic recovery, it is a safe bet that more CFOs will be enduring such public and constant scrutiny over their bank negotiations and liquidity strategy.

Collaboration is critical

Adam Bates — Fri, 13 Apr 2012 13:56:00 GMT

I was recently fortunate enough to travel to New Zealand where I met a variety of people from the government and private sector. A couple of subjects dominated our discussions: agriculture and the role of government in supporting and indeed coaching the private sector.

Agriculture, horticultural and forestry industries make up over 70 percent of the value of New Zealand’s exports, it is therefore absolutely vital to the country’s prosperity. But what struck me from all my discussions was the level of collaboration between New Zealand’s public and private sectors to maximise the value from these industries; both for today and the long term.

New Zealand has created profitable industries selling products globally by unashamedly endorsing a premium image for certain products. A couple of examples illustrate this well:

Merino wool is labelled the ‘finest and softest wool available’. The Merino sheep live in the Southern Alps of New Zealand. Wool from these sheep is an important export product and the duty free shops at the airport were packed with all sorts of woollen garments. I purchased a rather natty “Icebreaker GT quantum vest” for a premium price of £90.

The impressive thing, however, was that the product had a label sewn into the lining with a “baacode” (think about it). Enter this number into a website and you can quickly locate the exact farm from where your woollen vest came. Very slick, very compelling and clearly demonstrating the great cooperation between New Zealand’s farmers and Icebreaker, which manufactures and markets the goods.

Another example is the simple kiwifruit. Most of us have tasted kiwis at some stage; a fruit considered by many to be a clean, zesty and healthy snack. A New Zealand company, Zespri is the world’s largest marketer of kiwis.

It was formed following several years of overproduction and low prices for New Zealand farmers. It relies on a strong network of growers, post-harvest operators and other suppliers, distributors and customers to coordinate production and marketing of the fruit.

Zespri, however, is owned solely by 3,000 current and past growers. This collaboration is essential to ensure that funds are invested efficiently in marketing and innovative research and the benefits of scale are realised.

These examples highlight a few important points to me. First, it’s clear that the public and private sectors are planning strategically on how to deliver greater prosperity, security and opportunities through their industry.

Next, the industry is well aware of the many challenges involved in producing the best possible product. Whether it is the use of genetically modified genes, foreign ownership of agricultural land, the impact of a biosecurity incursion or attracting the right talent.

And also that collaboration between the producers, manufacturers and government is critical to ensure that the New Zealand product is able to punch above its weight in world markers.

My thoughts for 2020 then: If the public and private sector continue to work together, New Zealand will maintain its position as a provider of quality, sustainable and trustworthy agricultural products to world markets. As the demand for protein is increasing with many countries facing water scarcity, that puts New Zealand on a pretty strong footing.

So my questions to you include: how are you looking at innovative ways to collaborate with other parties to ensure you reach the right markets? How are you realising the value of working with government? And, how are you actively seeking lessons from other industries or geographies that you can apply to your own business?

By the way, the wool for my Icebreaker GT quantum vest came from four farms including Ida Valley owned by John Patterson.

Do boards appreciate fully their role as company stewards?

Michelle Perry — Thu, 12 Apr 2012 15:04:58 GMT

Shareholder activism, it seems, isn’t going away any time soon. And of course it’s refreshing to see. The Association of British Insurers, which represents almost a fifth of UK shareholders, this week raised concerns about Barclays chief executive Bob Diamond’s pay.

Diamond is set to pocket a hefty £17 million. The ABI’s shareholder advisory service, IVIS, had issued an "amber top" warning, indicating it has concerns after first voicing its worries over the pay packet two months ago. Pirc, a shareholder advisory service, said investors should reject Barclays' pay plan at the bank's annual shareholder meeting on 27 April.

The need to encourage investors to engage more with the companies they invest in hasn’t gone unnoticed by regulators. Over a year ago the Financial Reporting Council, the UK’s corporate governance watchdog, issued the Stewardship Code, a collection of guidelines to improve investor engagement with corporates, to address this very problem.

But has it done any good?

Recently John Kay, a respected economist who recently completed a government-sponsored report into equity markets, said the Stewardship Code had failed in its goal to promote tighter relationships between asset managers and boards.

Another new report put together by a group of six institutional investors, including Aviva investors and BlackRock, doesn’t so much want to replace the Code, but to “underpin” it. The group called the investor stewardship working party is calling on the FRC to incorporate its ideas to “improve the effectiveness of the Stewardship Code”.

In its report - 2020 Stewardship - the investor group comes up with four recommendations that it says will improve investor engagement. Of the four I think two are of particular note
The first is a proposal to encourage institutional investors who are signatories of the Stewardship Code to be more transparent about the degree to which they intend to plan to apply the code’s guidance.

Peter Butler, founding partner and CEO of Governance for Owners, an investment fund and one of the six investors behind the report, described the proposal as similar to a hotel rating system where investors are rated by the degree to which they adhere to the code. Butler says this would allow company boards and others a clearer view of what they are getting. I agree.

“We don’t need everyone to be a 5 star steward but let them self-assess the stewardship they plan to do within an overall common framework and be transparent. This would allow clients to compare different firms and know where they stand.”

The other proposal I think is worthy of further investigation is that of encouraging boards to achieve a critical mass of stewardship investors on their share register, with the aim of getting between 25 and 30 percent.

Butler says the purpose of this is to quantify how big a gap we’re dealing with in terms of a lack of shareholder engagement. Everyone talks about engagement being a problem, but no one knows the real extent of the problem, says Butler.

“Let’s give boards the responsibility for this,” he says. Again I would agree with Butler’s proposal of laying responsibility in the hands of boards and investors, because “No regulator can solve this.”

Maybe it’s time to step up the pressure on boards as well as investors to fully accept their responsibilities as company stewards. It’s worth a try at least.

Building up the cash piles

Peter Williams — Wed, 11 Apr 2012 09:06:40 GMT

If the chief financial officer of your company hasn’t tapped the bond market, what are you playing at? Corporate bonds markets are humming with records tumbling particularly in the US.

Every section of the market is getting a look in, yes even the junk boys and girls. According to data from Thomson Reuters some 130 US junk-rated companies sold $75 billion in bond in the first quarter of 2012. That is up 12 percent from the same period last year and astonishingly better than any period since 1980 when, as they say, records began.

Perhaps unsurprisingly the investment-grade have also been issuing like there is no tomorrow: they put the junk bond into perspective in raising $274.5 billion by the end of March, says Thomson Reuters/IFR. This beats the previous record by a whisker (by $2.2 billion to be accurate) set in the first quarter, yes just prior to the financial crisis.

CFOs are nothing if not shameless opportunists when it comes to capital raising: if they see a window of opportunity they’re scrabbling through it. Or to put it more politely they choose to accelerate their funding plans.

Never believe any of the PR rhetoric about carefully planned strategic fund raising. But planned or not who can blame them? Bloomberg data shows the debt market was offering the lowest-ever borrowing costs with the Bank of America Merrill Lynch index revealing yields on the top notch grades fell to 3.4 percent at the beginning of March, the lowest since 1986.

That yield is just a reflection of the low corporate default rate. Across the globe, 53 coporate issuers went bust in 2011, down from 81 defaults in 2010 and way off the record high of 2009. And of those 53, the vast majority were speculative grade by the time they went to the wall.

All this begs some questions: what do CFOs need the money for, will it last and what will happen next? To which the answer in all three cases is, ‘who knows?’ Ask a CFO who has just pocketed a few billion, ‘why?’ and the standard answers are paying down debt, possible acquisitions, working capital and other general corporate purposes.

But corporates are already sitting on huge cash piles - US non-financials have $1.24 trillion according to Moody’s, while in the UK it’s a modest £731.4 billion, says Deloitte. How much more do you CFOs need?

As for, ‘where next for the corporate bond market?’, the answer is directly related to the interest rate. If that ticks up, the market should slow down. But CFOs who have locked in long money at low prices won’t be losing too much sleep.

Politicians, regulators, central banks and the humble investor may all worry that the overheated bond market indicates a sag in confidence about world economies and the strength of sovereigns, rather than an upbeat view that good times are creeping back. But CFOs aren’t doing any hand-wringing analysis. Instead they’re just filling their boots.

Will it take a hefty fine for business to change?

Ben Griffiths — Wed, 11 Apr 2012 08:25:27 GMT

It’s been a bad week for Britain and bribery.

Two years since the 2010 Bribery Act was passed and a mere 12 months since it came into force and the criticism of corporate controls in this country are coming thick and fast.

Coutts, the blue-blooded bank to HM The Queen, was fined £8.75 million by City watchdog the Financial Services Authority for failing to take reasonable care to establish and maintain effective anti-money laundering systems and controls relating to high risk customers.

Next the FSA warned a clutch of investment banks were failing to properly address bribery and corruption, leaving them lacking in the right controls. It visited 15 firms, including eight global investment banks, and found the majority had not done enough.

Tracey McDermott, the FSA’s acting director of enforcement and financial crime, said that despite the high profile of the issue, the investment banking sector has been too slow and too reactive in managing bribery and corruption risks. Enforcement action could soon be taken against offenders.

Then on Friday the Organisation for Economic Co-operation and Development, under its 38-member anti-bribery convention, said that while the UK had significantly boosted its foreign bribery enforcement efforts, it needed to be more transparent when resolving cases.

“The opaque process and low level of information available about settlements may fail to instill public and judicial confidence,” the OECD added.

All in all this triple whammy of bad news is not good for the UK’s global reputation. Some of our major companies have previously been stung in corruption cases.

BAE Systems became the most high-profile when a probe - which was later dropped - was launched into its arms deals with Saudi Arabia. Most are now trying to clean up their acts but I’d be happier if there was more than a little urgency.

It’s worth remembering the warnings from a year ago - some of which I highlighted here.

Companies, banks or sole practitioners could be automatically criminally liable if anyone in their organisation or their agents bribes to win or retain business anywhere in the world.

It’s not like we haven’t been warned. Businesses can face serious fines or even seeing senior executives imprisoned if proper measures are not introduced. But in the rush to win business the proper protocols can be overlooked.

It’s just as well then that for now all we’re getting is organisations like the FSA and OECD gently warning banks and businesses need to get their houses in order.

From next year the new Financial Conduct Authority is expected to continue to focus on financial crime risks in banking and beyond to ensure firms are meeting their legal and regulatory obligations.

On the upside, the OECD found the Serious Fraud Office had significantly increased foreign bribery enforcement. And the UK government has made substantial efforts to raise awareness of the Bribery Act and the foreign bribery offence.

That means any failure will be reflected onto business rather than policy-makers. It’s time to act on bribery.

Osborne's fudged figures

Jaimie Kaffash — Mon, 26 Mar 2012 15:54:12 GMT

Chancellor George Osborne’s Budget would likely be described by Sir Humphrey - the fictional character from the 1980s TV series Yes, Minister - as “courageous”. In Yes, Minister-era civil service parlance this was shorthand for “could lose you the election”.

The chancellor’s most “courageous” move was arguably the decision to remove the 50p tax rate. It was was an ideologically-driven decision based on two fundamental principles: that people should not give more of their money to the state than they take home themselves. And second that lower taxation leads to increased economic growth.

Whether you agree with the first principle depends on your political beliefs. But there is a debate to be had for the second point. Remove the 50p rate, the argument goes, and the economy as a whole will grow. This is obviously a principle Osborne agrees with.

However, he chose to go for the blunter justification - that revenue will be raised regardless of a whether the economy grows. In a (failed) attempt to head off headlines of “tax breaks for the rich, tax hits for grannies”, Osborne and prime minister David Cameron tried to drive home their view that the wealthiest will bear the biggest burden in the current austerity drive. Osborne joyfully told parliament - and the millions of viewers watching the Budget - that the Exchequer would earn “five times more money each and every year from the wealthiest in our society”, primarily through a new stamp duty tax.

The calculation is based on a series of hypotheticals. While there is nothing wrong with this per se, to present the figures as definitive and a rebuttal of potential criticisms is cynical. More importantly, the statement prevents a real discussion of what the removal of the 50p tax rate will do for the economy as a whole.

So what are these hypotheticals?

The government calculated that the 50p tax rate is bringing in only £100 million to the Treasury coffers a year. This is because of the effect of the rate on the behaviour of additional rate taxpayers. But putting a figure on behavioural change is notoriously difficult. The Office for Budget Responsibility said the estimate was “reasonable”, but also uncertain. Is it really a strong enough premise on which to make such a bold claim?

Even assuming this £100 million guess was close to correct, there are problems with the “five times more” (that is, £500 million) pledge.

It is a fairly strong estimate that the 7 percent stamp duty on houses worth more than £2 million will bring in £260 million extra a year as described in the Budget book, as it will unlikely affect those wanting to sell from selling.

But the Treasury also expects to raise around £300 million a year through a cap on the amount that could be saved through income tax reliefs. As CFO World reported last week, experts are dubious about this figure.

Worryingly, if the £300 million figure were accurate the bulk of it is likely to come from capping charitable donations - not exactly the intended consequence.

In the grand scheme of things, a couple of hundred million pounds is neither here nor there when looking at overall revenues. But this major policy decision to remove the 50p rate of tax would have opened up an essential debate on the problems businesses say they face, and whether the public would side with them.

Instead, we have these best-guess - but explicitly unreliable - figures intended to deflect attention from the real issue at hand.

As slick as oil

Ben Griffiths — Mon, 26 Mar 2012 14:03:19 GMT

During the dark days of the recent recession British industry took a pounding as spending cuts and the consumer slowdown began to bite. Amid the gloom one sector provided a little-seen beacon in the far north of these islands.

The oil and gas industry, based in Aberdeen, managed to help the ‘Granite City’ outstrip London in terms of its gross value added - the official measure of a region’s contribution to the UK economy, according to the value of the goods and services it produces.

In 2009, at the height of the economic downturn, Aberdeen became the fastest growing city and the only top 10 UK city where gross added value grew - rising 1.1 percent from £28,442 to £28,731 per resident, according to accountants UHY Hacker Young.

It’s a timely reminder of the importance of Britain’s oil and gas business at a time when the humble motorist is struggling to come to terms with petrol soaring past £1.40-a-litre. Filling up the family car may be painful, but exploration and extraction companies have been welcoming Budget plans to stimulate investment in the UK’s continental shelf.

George Osborne set out additional measures aimed at securing more spending in the North Sea in his Budget. After offshore companies including British Gas owner Centrica threatened to pull the plug on investment last year, the regime has been made friendlier as the government looks to stimulate more exploration and drilling.

The package could see tens of billions of pounds in additional money gushing into the North Sea after tax relief was announced for decommissioning costs, which should delay decommissioning of infrastructure leading to another 1.7 billion barrels of oil and gas being extracted. According to industry group Oil and Gas UK, this could boost Treasury coffers with almost £30 billion of additional taxes over the next five years at a time when the nation needs it most.

During the current financial year, the country’s oil and gas industry is forecast to pay £11.2 billion of taxes - or roughly a quarter of all Britain’s corporation tax take. Next year that is expected to total £9.6 billion and £9 billion the year after.

Additionally, the extension of the field allowance regime to deep fields west of Shetland and to other smaller fields and the promise of an allowance for new investment in existing fields and infrastructure was also welcomed by the industry.

As the centre for Britain’s oil and gas industry Aberdeen was always going to benefit from a booming energy sector. Global demand for oil has kept exploration companies and the city’s host of oilfield services businesses busy, not just in the North Sea but around the world.

When all the attention has been on London and the impact of its financial services industry in losing thousands of high paying bankers and ancillary workers, Aberdeen’s oil and gas industry has been getting on with the job.

George Osborne could do worse than look to the example of this city in the far north as he plots Britain’s economic revival.

GSK's insincere announcement

Jaimie Kaffash — Thu, 22 Mar 2012 13:43:16 GMT

The £500 million investment by GlaxoSmithKline is undoubtedly welcome. It will create 1,000 jobs and is a boost to the important pharmaceutical sector in the UK. And it is a necessary boost for a sector that took a blow when Pfizer announced it was to close its Sandwich plant in February last year, resulting in the loss of 1,500 jobs - not news that the chancellor had wanted to hear.

Curiously, GSK chief executive Sir Andrew Witty restated his company’s announcement - originally made in 2010 - on Thursday the day after the Budget. Sir Andrew not only stepped into the press melee to reannounce the ‘old’ news, but he emphatically attributed the corporate decision to George Osborne’s statement on the Patent Box in the Budget.

“The introduction of the patent box has transformed the way in which we view the UK as a location for new investments,” Sir Andrew said.

Unsurprisingly - following a Budget that has received almost unanimous negative front pages - the government was keen to seize on the announcement.

David Cameron called it “excellent news”, while Osborne praised the decision as “refreshing”, stating that it was confirmation that his Budget had “changed the view of Great Britain”.
It doesn’t add up. It feels too much like they are working too hard to dress up old news in the latest trends.

Osborne first announced the changes to the patent box - which imposes a 10 percent tax on profits derived from patented products as opposed to the corporation tax rate (24 percent from April) - in the autumn of 2010.

This means that GSK’s decision was not an endorsement of the 2012 Budget. The only “news” today in its strictest sense was the location of the biopharmaceutical factory in Ulverston.

Indeed, GSK’s decision was not even necessarily an endorsement of this government, as it was the previous Labour administration that first proposed the patent box changes.
This feels all too familiar to last year’s ‘surprise’ announcement from WPP about its intention (which hasn’t yet happened) to relocate its HQ back to the UK the day after the 2011 Budget because of the changes to the controlled foreign companies rules.

Is there a problem with this though? Well, perhaps. It is disingenuous of ministers to hail ‘old’ news as an endorsement of a Budget announced yesterday, when it clearly isn’t the case. Although that it to be expected of politicians of any hue.

But it is GSK’s motives in making this announcement today that is a greater cause for concern. It raises questions about the relationship between business and government. This was not a case of a chief executive welcoming the policies (as Premier Oil did), which is their prerogative. It was making a slightly misleading announcement to garner positive publicity for the government of the day.

We have no reason to doubt that GSK’s original decision was a result of the patent box. And it’s no secret that the patent box has been devised with the help of the big pharmaceutical companies. But when strategic announcements are timed to align with the interests of politicians - especially when they are insincere - questions must be raised over the influence corporates are having on the government. Moreover do politicians and chief executives really think our memories are so poor?

Open for Business

Michelle Perry — Wed, 21 Mar 2012 16:09:25 GMT

Chancellor George Osborne on Wednesday was clearly determined to overturn the recent anti-business sentiment that prime minister David Cameron and business secretary Vince Cable has been recently fostering with their repeated attacks on executive pay.

The country’s top finance chiefs have been telling CFO World of their growing concerns over the ‘spread’ of anti-business sentiment.

Osborne opened his Budget speech to parliament on Wednesday with a clarion call that Britain was officially open for business and the Budget “unashamedly backs business”.
Indeed it put in place the final pieces in the jigsaw that the Treasury has been working towards in making Britain more competitive on the world stage.

Many of the announcements have however been widely mooted and/or previously announced. The reform of controlled foreign companies (CFCs), the introduction of the Patent Box regime, and improvements to R&D tax credits all encourage companies to base themselves and carry out new activity in the UK. But none of it is new.

The one new step that Osborne took to try to drive home a sense that the coalition government is not anti-business was his decision to cut the headline corporation tax by two percentage points rather than the planned one, taking the rate to 24 percent this April. But again this announcement was widely leaked.

Of course business will broadly welcome this headline grabber but the question tax experts are asking is ‘will it attract further international business to the UK?’ The big issue for CFOs is certainty in the tax system. Finance chiefs do not want change. In fact, Andrew Bonfield, CFO of National Grid recently told CFO World that the chancellor should avoid changes to the tax system in his Budget to secure some stability for business.

"I hope we'll see as little as possible in change. Let's have a little bit of stability and help create growth by having an environment that doesn't mean we are continually changing decisions,” he told us.

Still, one of the final barriers to a more favourable corporate tax system - the 50p tax rate - was today felled. The chancellor cut the rate to 45p for high earners after repeated criticism from business lobby groups that the high rate of tax was discouraging investment.

Bill Dodwell, head of tax policy at Deloitte, says: “The cost to the UK economy isn’t the tax paid by the highly-paid person who leaves, or who doesn’t come to the UK, but rather the cost of the activity led by that individual now being based in a different country. Where teams relocate, or where entire corporate activities move, the UK’s loss could turn out to be permanent.

“It is good to see the top rate of tax reduced to 45 percent with effect from April 2013.”
Whether business leaders welcome this Budget perhaps the more pertinent question is will it encourage economic growth? If today’s initial reactions from economists are to be believed, the prospects aren’t looking great.

I’ll leave you with just one chilling response.

“Stripping away the bells and whistles, this budget may appeal to some … but is essentially neutral and has done nothing to fundamentally change the outlook. The economy remains in a deep hole and austerity will grind on well into the next parliament,” says Andrew Smith, chief economist at KPMG.

Smith adds: “Things may not be getting worse, but they are not about to get much better either.

“The big question is whether private demand will expand to fill the gap. Experience so far is not terribly encouraging as exports have yet to take off and many businesses prefer to hoard cash rather than invest.”

FX markets mask underlying problems

Stephen Gallo — Wed, 21 Mar 2012 14:57:02 GMT

Today, many consummate observers of the forex space would tell you that the competing market forces of ‘risk on’ or ‘risk off’ have - at long last - yielded to more traditional drivers of currencies, such as the ‘relative differentials’ between countries based on variables like future expected output, inflation or interest rates.

The yen is weak again and such a phenomenon is synonymous with the previous longstanding G10 characteristic of higher rates outside of Japan, as well as the global ‘carry trade’.

Additionally, the US dollar has been rising in tandem with riskier assets, as higher short-term rates in the US have been supportive of both the currency and the longstanding notion that US demand tends to lead global economic upturns.

FX markets still reflect a high degree of uncertainty on the part of investors, although probably less today than they did a year ago as many credit channels now seem to be reopening. But, fluctuations in various currencies may also reflect a huge desire for a sense of ‘normality’ with respect to longstanding notions that may yet prove to be elusive.

In order to see normality restored, yen bears have to believe that rates will finally start to rise outside of Japan, just as bond bears have to believe that the long ‘bull run’ in sovereign debt has finally come to an end.

But, even more importantly, the highly cyclical behaviour of FX markets and other asset classes in the short-run completely masks the underlying flaws pertaining to the lack of a sustainable model for the global monetary system over the long-run.

The extreme ‘stop-and-go’ nature of the so-called recovery is probably one of the more abnormal features of the current scenario, but even more abnormal has been the response of some central banks.

Effectively, each rout in the global equity markets has been followed by an enormous injection of liquidity or ‘high powered money’, which has managed to push the rally further - in early 2009 with the Federal Reserve’s first round of quantitative easing, in late 2010 with the second injection and in September 2011 with ‘Operation Twist’.

Meanwhile, that the rise in global equity markets has come at the expense of ultra-low interest rates, and a meteoric rise in the price of gold is as abnormal as it is worrying. For instance, between 1980 and 2000 with annual compounding the price of gold and the S&P 500 returned -3.8 percent and +12 percent respectively.

This compares with returns of +21 percent and +12 percent between 2008 and 2011. These simple calculations would seem to suggest that ultra-low interest rates and currency debasement are hugely more responsible for rising equity markets today than they have been in the past.

If such phenomena indicate just how detached asset prices have become from fundamentals, then here is yet another irregular characteristic to note. Indeed, it would not be wholly inaccurate to conclude that G10 interest rates have needed to be far lower over the last 10 years than in previous decades in order to produce a given level of output.

If more traditional paradigms are playing out in FX, currencies may be trading off fundamentals in a global environment that is becoming riddled with bigger and bigger distortions.

In a post-Bretton Woods world, this should imply that exchange rates are delaying rather than fostering the necessary economic adjustments. If so, we should get ready for less stability and more explosive moves in FX in the quarters and years ahead.

Save us all from good men

Andrew Kakabadse — Wed, 21 Mar 2012 14:30:54 GMT

The John Kay review of the UK’s equity markets on behalf of business secretary Vince Cable has just been made public as an interim report. The views expressed came from a good, honest and thoughtful man. Kay emphasises that:

· Equity markets still have a role to play,

· Corporate leadership is fundamentally sound and if not then well intentioned,

· Boards are well configured and if only shareholders could display a bit more interest in the governance of their resources, things could be so much better

· Corporate and financial measurement and reporting processes are fine, but just a little stretched by short term fluctuations,

· Asset managers have a critical input in present day financial markets.

With so much good news, what really is the problem? Well it is all those intermediaries including our much needed asset managers.

If only that were the case! Imagine addressing a group of unemployed, middle class professionals and suggesting that if the intermediaries in the financial markets could redirect their testosterone-fuelled energy and curb their excesses a little, we will all be fine. What do you think this audience would say?

The Kay review reads like a Saturday-night soap, where the local bobby ticks off the neighbourhood layabouts chiding: “Smarten up, or I’ll go and tell your parents”.

Good men have many virtues, but seeing good everywhere around them is distinctly problematic. If, as the Kay report implies, things are really not so bad, why are so many out of work?

Why is our youth so disaffected? Why are so many children in poverty? Why are the City and Wall Street companies drowning in liquidity at a time of low interest rates with investors holding out for those elusive short-term transactions at high returns? Why so many lives are destroyed by their late 40s? Being made unemployed at 45 now means a life without meaningful work. Why with all these problems are massive bonuses being paid out at a time when capital is hardly being leveraged?

John Kay’s answer to all these questions is to have intermediaries behave like gentlemen. How can such naivety exist? We are on the verge of inflation.

Why is nobody shouting from the pulpit demanding investment in infrastructure as the way to reduce the anguish of unemployment and ever declining standards of living?

We were led into the global financial crisis by good men. I conclude that by the fact that no director, executive or non-executive has ever been brought to justice for their reckless gambling of our collective wealth. In fact quite the opposite! These very same people are supported by our political leaders to bide their time, so that they can return to their casino-like ways and be acclaimed as the heroes who turned the economy around.

One of the most respected economists of this country has recommended a slap on the wrist and greater transparency for intermediaries as the way forward in addressing our monumental problems.

Save us all from good men!

Talking real money

Peter Williams — Tue, 20 Mar 2012 09:47:12 GMT

Reading the Breedon report on Boosting finance options for Finance reminded me of the quote from US republican politician Everett Dirksen: “A billion here, a billion there, and pretty soon you're talking about real money.” At last, recognition that collectively the mid-tier is big money.

Context is all and this committee decided it needed to grab attention. So rather than hand wringing about the facts that banks don’t want to talk, never mind actually lend, to small companies anymore, it has decided to highlight the fact that the UK’s middle tier faces a £191 billion shortfall over the next five years. Actually if the economy really bombs it will be only £84 billion, but that’s mere detail.

Financing lots of companies is always a mug’s game. Pretend you’re a banker, what would your rather do lend £100 million to megacorp or £1 million to a 100 companies? Apart from the concentration/counterparty risk that megacorp may go bust (hey who cares, it’s not your money and what else is the credit rating agencies there for?) you’ve saved yourself 99 meetings/greetings/site tours in rather disagreeable parts of the country.

Never mind going before those sour-faced colleagues on the credit committees. So if the banks don’t fancy it any more then the government needs to do more. Breedon has rightly called for simplification, getting rid of what it calls the ‘alphabet soup’ of schemes supposedly designed to help small companies raise finance, but in fact designed to stop politicians harassing civil servants. As the report points out, the credit card is more use to small companies looking for finance than the government.

Behind the funding requirement headline lies the detail that readers of CFO World will readily recognise. The following ideas have all being discussed on this site: pooling SME loans to facilitate smaller company access to the public corporate bond market; increasing the number of UK-based private placement investors copying the US model; increasing the UK retail appetite for corporate bonds; and working together with larger corporates and professional bides to speed up adoption of supply chain finance ideas. In particular it wants government itself - the biggest customer the private sector has - to practise what it preaches in terms of turning supply chain finance from consultancy plan into reality.

These are all sound recommendations and the government should ensure that they don’t fade along with the spring daffodils. Further work is required to see why banks aren’t lending, but CFOs of larger corporates please note you don’t escape attention.

Most contentious is the return to the issue of late payment: Breedon devotes some space to telling government that it should ensure that if it pays big plc promptly then corporates should pay its smaller suppliers in a similarly swift fashion. It also want to explore ‘practical ways’ to encourage faster payment by large companies and look at how late payment legislation can be more effectively enforced. If the more esoteric ideas don’t work, the real thrust of this work could be to put the big/small corporate relationship back under the spotlight.

A day to bury news?

Ben Griffiths — Mon, 19 Mar 2012 14:19:06 GMT

‘Banks’ day of Shame’ was how one newspaper front page summarised the decision of Barclays, Royal Bank of Scotland and Lloyds Banking Group to publish their annual pay reports on the same day.

Just one of these documents can provide an entire day’s work for City journalists, analysts and other people determined to find out exactly how much top executives have taken home each year.

But the release of three remuneration reports within hours of each other smacked of more than a coincidence; an attempt perhaps to swamp the market with data on a busy Friday afternoon which also featured the Financial Services Authority’s long-awaited report into the collapse of Band of Scotland - now part of Lloyds.

It was a timely reminder that the issue of pay and rewards remains as sensitive as ever.

Last week the Department for Business Innovation and Skills launched its consultation on measures to give company shareholders greater influence over executive pay, through enhanced voting rights.

It set out a range of measures including an annual binding vote on future pay policy as well as increasing the level of support required on votes on future remuneration policy. An annual advisory vote on how pay policy is implemented in the previous year and a binding vote on exit payments of more than one year’s salary is also part of the plans.

The intention is clearly to enhance the connection between pay and performance. When the share prices of companies such as RBS and Lloyds have been decimated and investor returns flop, it is little wonder that institutional investors have also become angered, never mind the average retail shareholder.

Business secretary Vince Cable wants to put more power and information into shareholders’ hands so that they can help rein in rewards for failure and excessive pay. But will the BIS department’s ideas remedy the situation?

It’s a modern saw that director’s pay goes up when times are good and continues to go up when performance is poor.

What shareholders need is real powers to stop directors from enjoying bumper pay packages when their companies have been found wanting. What BIS and Cable are seeking is evidence about the potential cost of the measures and their likely impact on business practices.

I’m predicting the usual complaints from business about the burden of red tape and the cost of implementing the proposals.

Asset management giant Fidelity recently called for greater shareholder influence to be brought to bear on variable pay, in particular the requirement for an annual and forward-looking binding vote and a more demanding level of support from shareholders for remuneration policies.

The company is hopeful that when drafting their remuneration policies companies will embrace the chance for greater dialogue with shareholders.

It’s a somewhat optimistic view. I believe that only when companies are compelled to act by primary legislation can the scourge of rewards for failure be eliminated. Until then, shareholders should continue to up the ante by scrutinising remuneration reports properly and holding directors like those at Barclays, RBS and Lloyds to account.

Mega-merger madness

Ben Griffiths — Wed, 14 Mar 2012 09:48:56 GMT

Some investors have already criticised the proposed Glencore-Xstrata merger, perhaps anticipating regulators’ potential veto of such a behemoth.

Will the proposed merger of Glencore and Xstrata buck the recent trend of failed big mining deals and give the mergers and acquisitions market a shot in the arm?

For the army of City advisers including investment bankers, lawyers and public relations executives the juicy fees the near-£60 billion combination would yield promise to get 2012 off to a flying start.

The Glencore/Xstrata deal - dubbed Glenstrata by the City - represents the largest M&A deal since the US government bought almost 61 percent of insurer AIG in September 2010, according to Dealogic.

In Europe, it would be the largest targeted deal since April 2007 when RBS, Santander and Fortis carved up Dutch bank ABN Amro - the deal that brought disgraced banker Fred Goodwin’s empire to its knees.

Glenstrata would also be the biggest mining deal ever, creating a global mining and commodities trading powerhouse. According to credit rating agency Moody’s, Glencore would gain greater control of mining resources which could be fed into its trading operation, freeing the group from over-reliance on third-party miners.

The flip side is that Xstrata would gain access to Glencore’s trading platform and logistics network: the group owns ports, warehouses and ships as well as market intelligence.

The deal was initially well received by the market with shares in both firms boosted. But just days after the merger was announced, institutional investors Standard Life and Schroders said they would refuse to back the deal, and Royal London and Fidelity, the big US investment house, joined a growing list of shareholders seeking a change in the terms of the merger.

An investor roadshow was called to win shareholders over to the merits of the deal.
Acquiescence is crucial because, with Glencore already owning 34 percent of Xstrata, just 16.4 percent of shareholders would be needed to block the deal from going through.

Another potential threat comes from worldwide competition authorities. The huge mining and commodities group would have a dominant position in trading and big shares of the market for crucial raw materials such as copper, lead and zinc as well as coal.

If it were felt the combined group would have too much control over prices, it could find regulators are not prepared to give it the green light.

It’s little wonder then that to some observers, Glenstrata has started to look like one of the worst advised deals of recent years.

Not since FTSE 100 insurance group Prudential failed to convince the market of the need to raise new money through a rights issue to pay for its desired acquisition of rival AIA has a deal looked on such shaky ground.

And yet it comes at a time when the market is desperate for some deals to kick-start another M&A boom. Much smaller deals are starting to be seen: the approach by Switzerland’s Temenos for British rival Misys would create a £2 billion company.

But a successful mega-merger could fuel hopes of more to come later in 2012 and persuade companies to start making use of the cash piles they have been accumulating.

As KPMG’s Simon Collins said in the firm’s global M&A predictor report, deal activity is possible with corporate cash, private equity coffers and the availability of target companies.

Ultimately, what will matter to the future of the merger is how the deal is done. Investors need persuading. Regulators will need convincing. And employees from the boardroom to the trading floor and mine shafts will need to work hard to make sure the integrated business succeeds. That’s a lot of people to win over.

A liquid question

Peter Williams — Wed, 14 Mar 2012 09:45:16 GMT

The power of rating agencies is a by-product of the credit boom, says Peter Williams, but to curtail their influence would be to deny the industry a vital source of information

Prospects look grim for the rating agencies. After one round of regulation in 2009 just after the credit crisis struck, another round is being sought by eurozone politicians who clearly believe that shooting the messenger is a policy with many benefits and few drawbacks.

In November the European Commission (EC) said rating agencies should follow stricter rules, be more transparent about their ratings and be held accountable for their decisions. The main way of achieving this is to force firms to rotate their rating agency in the belief that would force greater competition and choice. Now where have CFOs heard that idea before?

While 15 credit rating agencies are authorised to act in the EU, the big three - Moody’s, Fitch and Standard & Poor’s - dominate the landscape.

Credit ratings offer an opinion on the chances of getting your money back from governments or big companies. They do that by looking at track records, leading some to criticise the credit rating system for being backward-looking, even if the markets still seem to like the comfort blanket they offer. Perhaps most of all they offer an easy answer for investors.

But if governments and corporates didn’t borrow, the agencies wouldn’t be in business. If they didn’t borrow so much, the agencies’ opinions would not have become so all-consuming. The power that agencies have is down to the enormous appetite to borrow and, until 2007, the enormous amount of credit that was swilling around the system: that is why agencies have only hit the headlines in the last decade.

Look back two decades and rating agencies were low-profile and perceived as nerdy.
Wind on 20 years and the fear of business is that if politicians put the boot in over how rating agencies look at sovereign debt, it will have unintended consequences for the way they approach the corporate market.

The British business lobby believes that the EC’s proposal would lead to a reduction in the number of agencies, deterioration in ratings quality and to fewer ratings being published. This would lead to an overall reduction in information flowing to the market.

But while politicians fulminate about rating agencies’ sovereign work, they need to bear in mind that they are a fundamental utility for companies trying to raise funds in the corporate market. They provide vital information to investors about credit standing that is not obtainable elsewhere.

The IMF recognises that ratings allow many borrowers access to markets that would otherwise be shut. In other words ratings contribute to the liquidity of markets.

That said, rating agencies could do with getting themselves some decent strategic communications advice: their handling of complex financial products has been poor and they need to make sure no more cock-ups happen along the lines of S&P’s mistaken French downgrade in November.

Maybe their work does need reinvigorating and the structure - especially the small number of serious players - is not suitable to the rigours of a 21st century market. But the EC’s proposal would scupper, not enhance, the possibility of new entrants.

The corporate debt market is set to be a key source of finance for business at a time when other lines such as bank loans and equity capital are being restricted, which is why it is vital to keep it functioning efficiently. And ratings are part of that.

With a banking system in crisis, confidence at rock bottom and economic prospects looking chilly, politicians would be either brave or foolish to decide they could risk further harm by pressing ahead with ill-considered reforms.

How to motivate staff?

Fri, 09 Mar 2012 11:08:20 GMT

The John Lewis Partnership was back in the news this week as the annual announcement of its bonus round for workers hit the headlines.

The 14 percent of salary payout for all partners - equivalent to seven weeks’ pay - is a far cry from the kind of bonus enjoyed by top flight bankers in the City of London. Not surprising then that media coverage of John Lewis’ results was positive. It has also attracted admiring glances from policymakers in Whitehall.

John Lewis’ employees own the company so any rewards they reap are justified. They work hard to grow sales and profits and are recognised accordingly, so rarely the case among the Square Mile denizens who have found themselves the targets of the most vociferous critics.

Alongside the 2011 results, John Lewis chairman Charlie Mayfield suggested more companies should follow the partnership model. While Mayfield admitted partnership may not be suitable for every kind of business, during a recession the model of co-ownership could be one way of helping to kick-start economic growth.

The City of London is no stranger to partnerships. Law and accountancy firms, brokerages, and investment banking boutiques apply similar principles. And a host of other mutual organisations such as insurers operate slightly differently in that they are owned by policy holders rather than workers.

Founder John Spedan Lewis’ objective for the partnership was to create success that could be measured by the happiness of its workforce and by its good service to the community.

It’s a far cry from the mission of boosting financial value that’s at the core of the public limited company model. Company boards have to answer to their increasingly short-termist shareholders who are sensitive to even the slightest wobble in the share price.

In contrast, a partnership can build for the longer-term when employees are offered a greater stake in the business they work for.

The partnership model is understood to work best for service industries, where individuals can focus on ensuring their own interaction with customers produces a positive result. This is just one reason why partnerships can shine during good times or bad.

On the downside, for companies that need large amounts of capital to fuel growth, partnership status presents a unique set of challenges. They cannot raise money in the capital markets like quoted companies. As they are owned by the workers they are unable to sell equity stakes. And more stakeholders means making decisions can be long-winded.

But employees have much more at stake when they are actively engaged in running the operation and not just cashing a pay cheque at the end of the month. Shared interest in the business’ success is a powerful motivator and natural creator of teamwork.

Little wonder then that a Cass business school report found employee-owned businesses grew sales faster and created more jobs during recession than their conventional rivals.

The report also found partnership businesses had employees who were more committed to delivering quality and were more flexible to meet the organisation’s changing demands.

These are crucially important factors during tough times.

ECB liquidity: the good, the bad and the irreparable

Mon, 05 Mar 2012 17:13:16 GMT

The net injection of liquidity at last week’s three year longer-term refinancing operations (LTRO) from the European Central Bank may have missed the more aggressive of market expectations, but the bottom line is that the heavy amounts of longer-term borrowing done by banks took the ECB’s balance sheet even further into uncharted territory. There is a sense of irony which pervades though.

On the one hand, most financial market participants would argue the ECB’s new president has ‘done the right thing’ by injecting more liquidity into the system. On the other hand, the need for such liquidity injections simply highlights just how badly the system has failed, as well as how close it is to not functioning altogether. There is no trust between banks in Europe, and trust is a cornerstone of a modern financial system.

It’s foolish to misjudge these liquidity injections from central banks as ‘costless’. For instance, too many people underestimate the negative effects that the UK’s devaluation and quantitative easing programme have triggered by way of ‘growth-inhibiting’ rates of inflation during 2011. Although some sectors of Western financial systems are holding up, it must also be remembered that this is occurring at extremely loose settings of monetary policy. How will the system cope with a reversal of these settings, and will such a reversal be gradual or will it need to be rapid?

Central bank liquidity injections contain elements of ‘the good, the bad and the irreparable’, and it is within a European context that these elements are perhaps best illustrated.

What’s ‘good’ about what the ECB has been doing with liquidity provisions since late last year? First, liquidity can prevent bank runs. On the one hand, there are important benefits to the forces of ‘creative destruction’ which choke the remaining life out of dangerous or non-performing sectors of banking systems or the real economy. On the other hand, creative destruction can be very painful or occur haphazardly, so liquidity injections allow the process to proceed more smoothly than it otherwise would.

Secondly, the ECB’s latest actions demonstrate the abilities of a flexible rather than an overly rigid central bank, and this increases the odds that the euro zone will survive intact. ECB president Mario Draghi is an American-educated, Italian central banker running a German-modelled ECB from Frankfurt, and he therefore embodies the true essence of European integration. This has to be ‘good’ for the euro.

What’s ‘bad’ about what the ECB has been doing? In both domestic and global contexts, excessively cheap loans to the banking system, or QE, can replicate pre-crisis capital flows by distorting the classical ‘risk for reward’ decision-making process. Effectively, ECB liquidity has been used by the banks to buy low-quality sovereign debt that would otherwise have been avoided. Perversely, this is analogous to subprime, which once seemed attractive to buy, sell or securitise mainly because the liquidity necessary to do so was overly cheap and readily available.

Even after all the central banks have done in recent years, the sustainability of our economic models is mainly at the mercy of politicians. Central bank liquidity buys politicians time, and in the process of economic reforms, it is up to the politicians to use that time wisely. If politicians fail to do so, history will likely judge the damage done by central bank liquidity injected today as irreparable.